a
province can assume responsibility for financing and administering a program that
in the other parts of Canada would be carried out by the federal government; to
assure that the contracting-out province or its citizens are not financially penalised,
the federal government pays to that province compensating sums of money either
directly or through tax abatements; or

a
province may receive a fiscal compensation instead of the federal contribution
to a program through a conditional grant arrangement.

The
method was first used in 1959 and led to an agreement between Quebec and the federal
government over university financing (see Massey
Report). Up until then, it had been assumed
that when a province chose not to participate in a shared-cost programme (conditional
grant) that it would suffer full financial penalties for this choice (the citizens
of a non-participating province would pay the same federal taxes as in the other
provinces but would not receive the same benefits).

Quebec
had been the province traditionally opposed to this type of programme arguing
that they were unwarranted encroachments by the federal government on provincial
spheres of jurisdiction. During the Duplessis administration, Quebec had refused
conditional grants for the construction of the Trans-Canada Highway, university
financing, hospital insurance, vocational training, forestry's activities,
civil defence, language training for immigrants, etc. In 1959, it was estimated
that Quebec received $46 million in conditional grants while it refused a further
$82 million. Hence, 64% of the amount available to the province had been refused
(that sum of money represented 13.7% of the revenues of the provincial government
of Quebec). Pressure mounted in Quebec, in the early sixties, for a commitment
by the federal government to work out, in consultation with the provinces, a contracting-out
formula. There was in the period of 1962-1965 good will evidently displayed by
the federal government and this activated further the discussions. In expectation
for such an arrangement, Quebec joined, between 1960 and 1962, most joint programmes
that it had so far refused. By 1962, tied 23% of the budget of the government of Quebec
was tied into joint programmes as opposed to 5% in 1958. A Federal-Provincial Conference
was held in Quebec City in the spring of 1964 to design a contracting-out formula.
Federal action came in the spring of 1965 when the Established Programs (Interim
Arrangements) Act was enacted by Parliament. The bill divided the arrangements
to which contracting- out was to apply into "Standing Programs" and
"Special Programs".

Standing
programmes included: hospital insurance, old age pensions, blind persons
allowances, disabled persons allowances, the welfare portion of the general
public assistance programme, health grants (excluding those for hospital construction),
and non -capital expenditures on vocational training. Special programmes were
to include: agricultural lime assistance, some forestry programmes, hospital construction,
camp grounds and picnic areas programmes and the road-to-resources programme.
Some programmes were excluded from contracting-out: capital grants for vocational
training, certain research grants, the unemployment part of the general public
assistance programme, the Centennial projects, municipal winter works, emergency
measures and projects under the Agricultural Rehabilitation and Development Act
(ARDA). Provinces that opted out of standing programmes would receive abatement
on the federal personal income tax. Each programme was assigned a unit value corresponding
to the estimated percentage yield of these abatements in Quebec (Quebec was rightfully
expected to be the main province opting out). The equivalent for the standing
programmes was to be cash payments based on the amount that the federal government
thought the province would have received as conditional grants if it had participated
in the programmes. A time limit was set to pull out of programmes and the arrangements
would have to be renegotiated at the end of each Tax Rental Agreement (every five
years).

The principle of
the opting-out formula is unique to Canada among the federations of the world
and is rather remarkable. It demonstrated on the part of the federal system a
flexibility to meet the special demands of Quebec, as it prized its autonomy more
than any other province. Originally, the smaller provinces were afraid that all
the large provinces would withdraw from shared-costs programmes and bring about
their cancellation by the federal government; thus, they would loose programmes
viewed as essential, which they could not afford to finance on their own. But,
as had been foreseen, only Quebec availed itself of the opportunity to opt out,
demonstrating how different it was from other provinces and increasing its special
position in Confederation.

In
1965-66, Quebec withdrew from 30 joint programmes (by 1968, only 5.5% of the Quebec
budget was tied into joint programmes; Quebec had come back full circle to the
situation prevailing in 1958. The value of the compensation to Quebec for abandoning
the joint programmes was equal to 20 additional tax points).

Though
remarkable in principle, the opting-out formula is far from perfect. Several criticisms
have been levelled against the idea or its application: many have felt, outside
Quebec, that

the opting-put
formula weakened the economic stabilising capacity of the federal government;
this criticism has some validity but many experts are now of the opinion that
the federal government doesn't need to control such a large share of the GNP to
be able to control the economic perfor-mance of the country (one might argue,
moreover, that it is the existence of the federal system itself which weakens
the central government's stabilising capacity and yet nobody suggests seriously
that we should abolish the federal system... ;

some
have argued that the formula is only one more way in which the federal government "caters" to Quebec and that the opting-out formula reinforces the feeling
inside Quebec that it is a province different from the others, hence weakening
the unity of Canada The validity of this criticism is dubious on two counts:

contracting out was offered to
all provinces but all, except Quebec, for one reason or another, refused them;
the federal government did not want to give Quebec a special status, that status
merely emerged because the other provinces did not opt out of the joint programmes
when they had the right to do so;

the
fact that Quebec is not a province like any other is not the result of the opting
out formula but rather the cause for introducing the formula; the formula doesn't
threaten the unity of Canada but its inexistence might very well do so.

Within
Quebec, five different types of criticisms have been levelled against the application
of the formula:

there
are still limitations on the types of programmes from which a province may opt
out;

the interim period
has been extended ever since 1965; no permanent arrangements have yet been made;
Claude MORIN argues in Quebec Versus Ottawa (p. 18) that the federal government
is merely waiting for a political juncture where Quebec would "normalise"
its relations with the federal government, abandon its claim to a special position
in Confederation and rejoin all joint programmes. The theory is very credible
in view of the fact that the "Interim arrangements" have now been extended
so many times, yet have not been formalised in the Constitution;

Quebec
must still, even from such programmes from which it had opted out, "maintain
its present obligations" in respect to the instituted programmes. In other
words, even though a province pulls out of a specified programme, it must still
continue the programme in the province, furnish the federal government with audited
financial reports on the expenditures and participate in the federal-provincial
meetings established for the purpose of co-ordinating the programmes. The purpose
of the opting-out formula was presumably to assure a province of its autonomy
but the principle is undermined by the regulating restrictions introduced by the
federal authorities. The opting-out province lives under what Morin calls, correctly,
"surveyed liberty."

Contrary
to what is often thought, Quebec has not obtained, by opting out, any new powers
which formerly it would not have had under the Constitution Act (1867). Those programmes subjected
to the opting-out formula were all originally, at least partly, under the provincial
sphere of jurisdiction. The province, it was argued, had merely regained ground
lost in the past.

Still,
the federal government retains the right to unilaterally cancel, reduce or alter
its contribution to a joint programme. In such a case the financial compensation
to the opting-out province is automatically lost; such cancellations have already
occurred since 1967, as priorities of the federal government have shifted.

The
solutions to the problems and criticisms that have arisen on the subject of shared-cost
programmes and of the opting-out formula seem to rest in a constitutional amendment
guaranteeing

the right
of a province to opt out of a federal sponsored programme;

that
fiscal compensation equivalent to the cost of operating the programme would be
paid to the opting out province and that it would have the power to use
such sums as it would receive from opting out for whatever purpose(s) it would
desire, thus protecting the autonomy of the provinces;

that
the federal government would require the near unanimous support of the provinces
to institute a joint programme and similar support to cancel it.

A
small step in the direction indicated above was taken in 1982 in the Constitutional
Act of that year. Article 40 provided that where an amendment transferring power
from the provinces to the federal government on "education or other cultural
matters", reasonable compensation would be provided and thus no penalty would
apply for any province to which the amendment would not apply. Thus a province
had a right to opt-out of such amendments and would not be penalised for it.

In
1987, the Meech Lake Accord proposed to extend the principle of compensation for
opting out of all amendments transferring legislative authority from the provinces
to the federal government. The clause came under vicious and unrelenting attacks
from those who believed that it would render future "national programmes" impossible to create and that it would balkanise Canada. Pierre Trudeau was especially
forceful in his denunciation of the clause, arguing among other reasons, that
the principle of opting out ought to be rejected altogether. This view was rather
surprising in light of the fact that he had accepted the Constitutional amendment
of 1982 that included a provision for opting out. In 1992, the Charlottetown Accord proposed a similar clause to the Meech Lake Accord, but to no avail as the Accord
failed to obtain a majority in the national referendum that was held on the question.